Steel Industry Outlook Federal Reserve Bank of Chicago December 2005 Robert J. DiCianni Mittal Steel USA 1
Outline Overall Outlook End Market Outlook 2006 Forecast Steel Demand Prices Inputs and other factors 2
Economic Outlook for 2006 2004 2005 2006 GDP 4.2% 3.5% 3.3% Industrial Production chge 4.1% 2.7% 3.0% Business Inventory Chge $b 49.9 22.7 31.7 Auto sales (million units) 16.9 17.0 17.1 Housing Starts (mil units) 1.95 2.03 1.83 Consumer Sentiment 95.2 87.4 91.9 CPI 2.7% 3.5% 2.7% Mfg Capacity Utilization 76.7% 78.3% 78.9% 3
Industrial Production Manufacturing Only Production Index 123.0 121.0 119.0 117.0 115.0 113.0 111.0 109.0 107.0 105.0 '99 '00 '01 '02 '03 '04 '05 83 81 79 77 75 73 71 % Utilization 4 Index Utilization Manufacturing Production Index and Capacity Utilization
Industrial Production Manufacturing Only Production Index Note that on November 7, 2005 the Federal Reserve changed the base year to 2002 111.0 109.0 107.0 105.0 103.0 101.0 99.0 '03 '04 '05 80 79 78 77 76 75 74 73 72 71 % Utilization 5 Index Utilization Manufacturing Production Index and Capacity Utilization
ISM Manufacturing Index 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 Mar'01 Jun'01 Sept'01 Dec'01 Mar'02 Jun'02 Sep'02 Dec'02 Mar'03 Jun'03 Sep'03 Dec'03 Mar'04 Jun'04 Sep'04 Dec'04 Mar'05 Jun'05 Sep'05 This ISM index has continued to show forward growth in the manufacturing sector. Over 50 indicates expansion in manufacturing. 6 Source: Institute for Supply management
Automotive Market has underperformed for three straight years Imports continue to rise; from 3.2 million in 2002 to 4.2 million in 2005 About one ton of flat rolled steel per vehicle; 350 pounds of bars and other per vehicle 17.5 17 16.5 16 NA production (millions of units) 15.5 15 14.5 2000 2002 2003 2004 2005 7
Major* Appliance Annual Shipments History and Forecast Millions of Units 50 45 40 35 30 25 20 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 Appliance shipments drop from record levels as housing starts fall. 1.9m ton market Forecast = * Washers, Dryers, Dish Washers, Refrigerators, Freezers, Free-Standing Ranges, Built-in Ranges 8
Electric Machinery Electric motors feed everything U.S. demand is steady Chinese motors are staying in China Significant growth in Mexico Industry has gone through significant consolidation AOSmith Regal/Beloit Emerson Hurricanes spurring demand 2005 = 1.6m tons 2006 = 1.6m tons 9
Commercial and Industrial Fasteners Hand Tools Containers Cans Office Furniture Material Handling Equipment Storage Tanks 2005 = 7.9m tons 2006 = 8.0m tons 10
Office Furniture Consumption Office Furniture Consumption Change in Consumption Billions of Dollars $16 $14 $12 $10 $8 $6 $4 $2 $0 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 20% 15% 10% 5% 0% -5% -10% -15% -20% '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 The Office Furniture market will continue its recovery as business investment continues to expand. 11 BIFMA History and Forecast as of November 2005
Fixed Investment - USA Non-Residential and Residential Percent Chgange 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Forecast 2000 2001 2002 2003 2004 2005 2006 2007 Non-Residential Residential 12
U. S. Steel Service Center Total Shipments & Inventories Carbon Flat Rolled 3500 3300 3100 2900 2700 2500 2300 2100 1900 1700 1500 Based on a representative sample of the U.S. Service Center Industry Monthly Shipments,000 Tons '02 M M J S N Monthly Shipments Month End Inventory '03 M M J S N '04 M M J S N '05 M M Ending Inventory,000 Tons J S 10500 10000 9500 9000 8500 8000 7500 7000 13 Not seasonally adjusted January 2002 through October 2005
U. S. Steel Service Center Number of Months Shipments on Hand Based on a representative sample of the U.S. Service Center Industry 5.6 Carbon Flat Rolled 5.1 Months-on-Hand 4.6 4.1 3.6 3.1 2.6 2.1 '02 A J O '03 A J O '04 A J O '05 A J O 14 Not seasonally adjusted January 2002 through October 2005
U.S. Segment Demand Forecast Segment 2004 2005 2006 % Change Automotive 10.8 10.9 10.9 0% Appliance 1.9 1.9 1.8-5.2% Construction 8.4 9.4 9.7 +3.1% C & I 7.6 7.9 8.0 +1.5% EMM 1.5 1.6 1.6 0% Distribution 26.4 23.2 25.6 +10.3% Imports 10.8 6.3 6.4 +1.5% Totals 67.4 60.2 63.8 +5.9% 15
Apparent Steel Consumption - USA Millions of Tons 130 125 120 115 110 105 100 95 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 2004 and 2005 were impacted by abnormal swings in inventory. Service center inventories grew by over 4 million tons in 2004. By August 2005, the entire 4 million tons was consumed. This means the Apparent Steel Consumption in 2004 overstates actual consumption by 4 million tons and that the Apparent Steel Consumption in 2005 understates actual consumption by 4 million tons. Apparent consumption = AISI shipments + finished imports exports 16 = Estimate or Forecast
Steel Prices Hot Rolled Cold Rolled Hot Dip Galvanized $800 $700 $600 $500 $400 $300 $200 2001 2002 2003 2004 2005 2006 Source: Purchasing Magazine 17
U.S. Steel Consumption with Imports Consumption Imports 140 40 120 35 100 30 80 25 60 20 40 15 20 10 1993 1995 1997 1999 2001 2003 2005 Source: Global Insights 18
Trends Global demand is growing Lack of investment in infrastructure has put pressure on the global industry Production cost increases China still leads consumption growth 19
Global Apparent Steel Consumption 1998 through 2004 1200 1100 1067 1106 1160 Short Tons x 1 million 1000 900 800 700 600 754 775 837 849 904 977 500 400 1998 1999 2000 2001 2002 2003 2004 2005 2006 20 Forecast is for an increase of another 100 million tons from 2004 to 2006.
World and China Consumption 000s of tons 1200 1000 800 600 400 200 0 1999 2000 2001 2002 2003 2004 2005 2006 World China consumption 21
Trends 2004 saw an explosion in demand for iron ore and coke. Mills were caught flat footed by the surge in raw materials prices in 2004 and 2005 Iron ore and coke prices are up so substantially that sizable increases in capacity to produce these materials are occurring now. New capacity should limit increases in costs for iron ore and coke over the next few years. Alloys are still very expensive 22
Scrap Moderate gains in global steel demand produce huge increases in actual metallics requirements (iron, scrap, or scrap substitutes) The industry will have a metallics supply problem on a long term basis International trade in steel scrap will rise as steelmakers find the supply is not sufficient in their home markets 550 million tons of scrap required; 700 to 800 million tons of iron 23
$/Gross Ton Prices - Scrap Steel Auto Bundles Purchasing Magazine $500 $450 $400 $350 $300 $250 $200 $150 $100 Jan'04 $307 $293 $255 $260 $240 $247 $217 Mar May Jul $423 $443 $408 $390$385 $370 Sep Nov Jan'05 $305 $278 $250 298 295 $215 230 205 $155 158 Mar May Jul Sep Nov* Scrap exports had increased significantly but are now beginning to fall. Supply of scrap substitutes are now beginning to flow into the USA again and scrap processing has increased. Some scrap price moderation is expected. January 2004 through October 2005 plus November projected 24
2006 Forecast The economy will continue to grow only at a slower pace Housing starts will drop from record levels Auto production steady Appliance shipments will decrease slightly from record levels Non-residential construction will increase, some of it hurricane driven Inventories will increase Imports will increase Steel consumption will increase and apparent consumption will increase even more vs 2005 Oil prices remain a risk 25